You are here

Central bank holds interest rate steady

OTTAWA—The Bank of Canada is holding interest rates steady as the economy navigates a temporary period of softness created by the sharp drop in oil prices, governor Stephen Poloz said yesterday.

The recent plunge in crude prices has darkened the central bank's short-term economic outlook—but Poloz predicted the country-wide effects of the oil slump to dissipate in the coming months and to allow Canada's healthy economic expansion to resume with fresh momentum.

“As the snow melts, we'll have a clearer view that the economy is back on track and then likely to grow above or around two percent after that,” Poloz told reporters after announcing the bank would keep its benchmark interest rate at 1.75 percent.

The bank reiterated yesterday that more rate increases still will be necessary, but this time it inserted the phrase “over time” to its statement.

“It's meant to inject a degree of ambiguity into the timing of this because obviously we're dealing with developments over the last few months that constitute a delay,” Poloz said when pressed for an explanation.

“The phrase 'over time' is meant to convey that there's no regularity, there's no preset course—it's all about data and it's purposefully vague,” he noted.

“So that's why I'm not going to explain how long it means.”

Thanks to the stronger economy, Poloz has raised the bank's key interest rate target five times since mid-2017 to keep inflation from creeping up too high.

The Bank of Canada has estimated it no longer will need to hike the rate once it reaches a “neutral” level of between 2.5 and 3.5 percent—a destination range Poloz said is under review and could be updated in April.

The bank said the timing of its next hike will depend on several factors, with a particular focus on developments in the oil markets, the Canadian housing sector, and global trade policy.

The recent drop in crude prices will have a “material impact” on the Canadian outlook, the bank said.

The result will be slower-than-expected growth in an economy the bank said has been performing well otherwise.

It's now projecting growth to be just 1.7 percent in 2019, down from its October forecast of 2.1 percent, but it remains optimistic the economy will begin to strengthen again as early as the second quarter of this year.

Growth for the fourth quarter of 2018 now is expected to be 1.3 percent, compared with the bank's earlier prediction of 2.3 percent, while growth over the first three months of 2019 is projected to be just 0.8 percent.

The bank estimates the oil slump, which began last summer but has seen prices recover in recent weeks, will reduce the level of Canada's gross domestic product by 0.5 percent by the end of 2020.

The economic impact of the decline is expected to be about one-quarter as large as the 2014-16 oil-price shock, the bank noted.